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Geopolitical shocks and currency co-movement: Country and risk regime heterogeneity

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  • Sun, Yike
  • Fan, Cunqi
  • Wu, Yimin

Abstract

We find geopolitical shocks significantly reshape the anchoring structure of currency co-movement in the international monetary system. Using daily exchange rate data from 30 economies, we embed geopolitical shocks into a panel Frankel–Wei framework and construct a renminbi-specific return factor to address multicollinearity. We document substantial country and risk regime heterogeneity: advanced economies strengthen co-movement with the US dollar as geopolitical shocks rise, whereas emerging and developing economies exhibit stronger euro anchoring. The anchoring structure reweights under normal shocks but becomes more dispersed under extreme shocks, with no anchor currency exhibiting a clear increase in dominance. Dynamic analysis reveals limited and short-lived reweighting under normal shocks but strong, persistent, and state-dependent adjustments during extreme regimes.

Suggested Citation

  • Sun, Yike & Fan, Cunqi & Wu, Yimin, 2026. "Geopolitical shocks and currency co-movement: Country and risk regime heterogeneity," Finance Research Letters, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:finlet:v:101:y:2026:i:c:s154461232600560x
    DOI: 10.1016/j.frl.2026.110031
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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